December 10, 2018
I recently ran into a situation where I was contacted by a client that wanted to move to a larger manufacturing facility.The lease was up at the current building, the business has grown, and it was time to upgrade.The client had been working with a real estate broker and together they had identified a prospective property.The client and broker worked with the prospective landlord and his broker and by the time I was called, the terms of the lease had more or less been agreed upon.I was asked to draft the lease, memorializing these terms, and adding in standard protections that we try to include in every lease that we draft.
In the meantime, the property owner apparently asked their own attorney to do the same thing.You would have thought, since the prospective tenant and prospective landlord had agreed on all of the material terms, that the lease I drafted and the lease the landlord’s attorney drafted would be somewhat similar.And you would be wrong.
The disconnect arose because of the different types of commercial leases used in the industry. To illustrate, I’ll use $1,000/month as the rent payment, $100 for insurance, $200 for property taxes, and $300 for utilities and janitorial service, and $400 for other building expenses:
Gross Lease – Tenant pays $1,000 per month and that covers rent, utilities, property taxes, maintenance, and any other fees attributable to the property.Tenant’s total out of pocket per month: $1,000.
Single Net Lease – Tenant pays $1,000 per month and that covers rent.Tenant is responsible for property tax and utilities.Tenant’s total out of pocket per month: $1,500.
Double Net Lease – Tenant pays $1,000 per month and that covers rent.Tenant is responsible for property taxes, insurance and utilities.Tenant’s total out of pocket per month: $1,600.
Triple Net Lease – Tenant pays $1,000 per month and that covers rent.Tenant is also responsible for property taxes, insurance, utilities and all other building expenses.Tenant’s total out of pocket per month: $2,000.
In my recent case, the parties thought they had an agreement because they had agreed on the monthly rental rate.As it turns out, they did not see eye to eye at the end of the day regarding what additional expenses the tenant was going to be responsible for.As you can see from the above illustration, the difference in total monthly out of pocket charges to the tenant can be quite significant, depending on the type of lease that is signed.
Generally, a gross lease will favor the tenant and a triple net lease will favor a landlord.Both parties should keep in mind, that every expense is negotiable and it is important to understand who is responsible for what at the outset.